FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period to
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Commission file number 0-21594
MFS COMMUNICATIONS COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 47-0714388
(State of Incorporation) (I.R.S. Employer Identification No.)
11808 Miracle Hills Drive, Omaha, Nebraska 68154
(Address of principal executive offices) (Zip Code)
402-231-3000
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------------ ------------
The number of shares outstanding of each class of the issuer's common
stock, as of August 2, 1996:
Common Stock ($.01 par value)............ 162,576,315 shares
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Part I - Financial Information
------------------------------------
Page
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Item 1. Financial Statements
Consolidated Statements of Operations........................... 1
Consolidated Balance Sheets..................................... 2
Consolidated Statement of Changes in Stockholders' Equity....... 4
Consolidated Statements of Cash Flows........................... 5
Notes to Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 12
Part II - Other Information
---------------------------------
Item 1. Legal Proceedings.............................................. 23
Item 6. Exhibits and Reports on Form 8-K............................... 23
Signature ...............................................................24
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
------------------ ----------------
(dollars in thousands,
except per share data) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $229,706 $140,005 $416,022 $258,345
Costs and expenses:
Operating expenses 217,911 139,135 392,084 259,017
Depreciation and amortization 47,979 31,648 92,588 60,721
General and administrative
expenses 33,862 27,783 68,754 53,724
------- ------- ------- -------
299,752 198,566 553,426 373,462
------- ------- ------- -------
Loss from operations (70,046) (58,561) (137,404) (115,117)
Other income (expense):
Interest income 5,147 3,520 10,791 6,812
Interest expense, net (26,854) (9,123) (50,480) (18,751)
Other (843) (564) (1,627) (1,480)
-------- -------- --------- --------
Total other income (expense) (22,550) (6,167) (41,316) (13,419)
-------- -------- --------- --------
Loss before income taxes (92,596) (64,728) (178,720) (128,536)
Income tax expense (100) (100) (200) (200)
-------- -------- --------- --------
Net loss (92,696) (64,828) (178,920) (128,736)
Dividends on preferred stock (7,460) - (14,532) -
-------- -------- --------- --------
Net loss applicable to common
stockholders $(100,156) $(64,828) $(193,452) $(128,736)
========== ========= ========== ==========
Net loss per share applicable
to common stockholders ($0.79) $(0.50) ($1.54) ($1.00)
========= ======== ======== =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE> 1
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
(unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 74,680 $ 51,182
Marketable securities............................ 212,448 85,715
Accounts receivable.............................. 198,722 140,302
Costs and earnings in excess of billings on
uncompleted contracts........................... 56,646 45,142
Other current assets............................. 53,029 51,703
--------- ---------
Total current assets........................... 595,525 374,044
Networks and equipment, at cost.................... 1,634,310 1,315,952
Less accumulated depreciation and amortization... (282,918) (213,548)
--------- ---------
Networks and equipment, net.................... 1,351,392 1,102,404
Goodwill, net...................................... 277,910 281,848
Other assets, net.................................. 128,213 108,838
--------- ----------
Total assets..................................... $2,353,040 $1,867,134
=========== ===========
</TABLE>
<PAGE> 2
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of notes payable
and long-term debt........................... $ 2,025 $ 1,995
Current portion of capital lease obligations... 2,862 1,922
Accounts payable............................... 174,259 172,407
Accrued costs and billings in excess of
revenue on uncompleted contracts............. 42,740 28,686
Accrued compensation........................... 14,157 6,119
Other current liabilities...................... 75,244 63,328
--------- ---------
Total current liabilities.................... 311,287 274,457
Notes payable and long-term debt,
less current portion........................... 1,299,210 692,059
Capital lease obligations, less current portion.. 30,145 31,412
Other liabilities................................ 26,864 27,902
Minority interest................................ 11,591 10,972
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
25,000,000 shares:
Series A, 8% cumulative convertible;
issued 94,992 in 1996 and 95,000 in
1995, variable liquidation preference...... 1 1
Series B, 7 3/4% cumulative convertible;
issued 15,000,000 in 1996 and 1995,
liquidation preference $1.00 per share
plus unpaid dividends...................... 150 150
Common stock, $.01 par value. Authorized
400,000,000 shares; issued 126,824,589 in
1996 and 130,260,228 in 1995 (Note 3)........ 1,268 651
Additional paid-in capital..................... 1,501,234 1,512,394
Deferred charge................................ - (1,017)
Foreign currency adjustment.................... (842) 45
Unrealized investment gain (loss).............. (790) 204
Accumulated deficit............................ (827,078) (555,221)
---------- ----------
673,943 957,207
Treasury stock, 5,800,000 shares, at cost...... - (126,875)
---------- ----------
Total stockholders' equity................... 673,943 830,332
---------- ----------
Total liabilities and stockholders'equity.... $2,353,040 $1,867,134
=========== ===========
</TABLE>
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See accompanying notes to consolidated financial statements.
<PAGE> 3
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Six Months Ended June 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Series A Series B Additional Foreign
Preferred Preferred Common Paid-in Deferred Currency
(dollars in thousands) Stock Stock Stock Capital Charge Adjustment
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 1 $ 150 $ 651 $1,512,394 $ (1,017) $ 45
Stock dividend on Series A
Preferred Stock - - 3 14,141 - -
Stock options exercised - - 14 14,303 - -
Amortization of deferred
charge - - - - 1,017 -
Foreign currency adjustment - - - - - (887)
Change in unrealized
investment gain (loss) - - - - - -
Retirement of treasury stock - - (29) (48,053) - -
Stock compensation plan
additions - - - 9,078 - -
Two-for-one stock split - - 629 (629) - -
Net loss - - - - - -
----- ----- ------- ---------- -------- -------
Balance at June 30, 1996 $ 1 $ 150 $1,268 $1,501,234 $ - $ (842)
===== ===== ======= ========== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Investment Accumulated Treasury
Gain (Loss) Deficit Stock Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 204 $(555,221) $(126,875) $ 830,332
Stock dividend on Series A
Preferred Stock - (14,144) - -
Stock options exercised - - - 14,317
Amortization of deferred
charge - - - 1,017
Foreign currency adjustment - - - (887)
Change in unrealized
investment gain (loss) (994) - - (994)
Retirement of treasury stock - (78,793) (126,875) -
Stock compensation plan
additions - - - 9,078
Two-for-one stock split - - - -
Net loss - (178,920) - (178,920)
------- ---------- --------- ---------
Balance at June 30, 1996 $ (790) $(827,078) $ - $ 673,943
======== ========== ========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE> 4
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------
(dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(178,920) $(128,736)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 92,588 60,721
Non cash interest expense 45,954 17,474
Non cash compensation expense 6,885 -
Loss on sale of securities - 1,271
Changes in assets and liabilities,
net of effects of acquisitions:
Accounts receivable and other current assets (80,019) (35,271)
Other liabilities 35,110 17,708
--------- ---------
Net cash used in operating activities (78,402) (66,833)
--------- ---------
Cash flows from investing activities:
Purchases of networks and equipment (311,933) (249,435)
Proceeds from maturities and sales
of marketable securities 280,985 319,266
Purchases of marketable securities (404,596) (278,983)
Purchases of minority interest in subsidiaries - (1,522)
Acquisitions of businesses, excluding cash acquired - (14,858)
Additions to deferred costs and other (12,096) (9,607)
--------- ---------
Net cash used in investing activities (447,640) (235,139)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt
and notes payable 643,812 6,075
Proceeds from issuance of preferred stock - 306,646
Payments of debt financing costs (20,487) -
Payments on long-term debt, including current portion (88,102) (3,035)
Proceeds from exercise of stock options 14,317 2,339
--------- ---------
Net cash provided by financing activities 549,540 312,025
--------- ---------
Net change in cash and cash equivalents 23,498 10,053
Cash and cash equivalents at beginning of period 51,182 21,518
--------- ---------
Cash and cash equivalents at end of period $ 74,680 $ 31,571
========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE> 5
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Supplemental schedule of non cash financing and investing activities:
The Company recognized a common stock dividend on preferred stock of $14,144
in the six month period ended June 30, 1996.
The Company capitalized non-cash interest expense of $7,108 and $8,852 in the
six month periods ended June 30, 1996 and 1995, respectively.
In the first six months of 1995, the Company purchased the stock of companies
that provide telecommunications services in Richmond, Virginia, Denver,
Colorado and White Plains, New York for $12,655 in cash and the issuance of
stock. In connection with the acquisitions, liabilities were assumed as
follows:
Fair value of tangible assets acquired $11,328
Fair value of intangible assets acquired 13,226
Cash paid for stock (12,655)
Stock issued (5,912)
-------
Liabilities assumed $ 5,987
=======
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE> 6
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
1. Basis of Presentation:
The consolidated balance sheet of MFS Communications Company, Inc. and
Subsidiaries (the "Company") at December 31, 1995 was obtained from the
Company's audited balance sheet as of that date. All other financial statements
contained herein are unaudited and, in the opinion of management, contain all
adjustments necessary for a fair presentation of financial position and results
of operations and cash flows for the periods presented. Such adjustments
consist only of normal recurring items. The Company's accounting policies and
certain other disclosures are set forth in the notes to the annual consolidated
financial statements.
2. Income Taxes:
The income tax expense of $100 for the three months ended June 30, 1996 and
1995, and $200 for the six months ended June 30, 1996 and 1995, resulted from
estimated state and foreign tax liabilities.
3. Capital Stock:
In the first quarter of 1996, the Company retired the shares of common stock
that were held in treasury. The value of the treasury shares reduced common
stock, paid in capital and increased the accumulated deficit upon retirement.
In addition, the Company's stockholders approved an amendment to the
Company's restated certificate of incorporation to increase the number of
authorized shares of common stock to 400,000,000.
On April 1, 1996 the Board of Directors declared a two-for-one common stock
split. The stock split was effected in the form of a stock dividend that was
payable to stockholders of record on April 16, 1996. The conversion features of
the Company's Series A and Series B preferred stock were adjusted pursuant to
their terms to maintain the proportionate rights of those preferred stocks.
In this report, all per share amounts and numbers of shares have been
restated to reflect the stock split. In addition, an amount equal to the $.01
par value of the shares outstanding at April 16, 1996 has been transferred from
additional paid in capital to common stock.
In July, 1996 the Company sold 35,650,000 shares of $.01 par value common
stock at $37.125 per share. The proceeds of the offering, net of the
underwriters discount and expenses of the offering, was approximately $1.3
billion.
4. Loss Per Share:
Loss per common share has been computed using the weighted average number of
shares outstanding for each period. The number of shares used in computing
loss per share, which have been adjusted due to the two-for-one stock split,
was 126,176,000 and 125,596,000 for the three and six month periods ended
June 30, 1996 and 128,960,000 and 128,845,000 for the three and six month
periods ended June 30, 1995, respectively.
<PAGE> 7
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
5. Long Term Debt:
(a)Loan Agreement:
On January 2, 1996, the Company entered into a $20,000 loan agreement with an
equipment manufacturer and a bank. The loans under the agreement, which
include interest at a variable rate, will be used to purchase equipment
supplied by the manufacturer. The loans must be repaid in semi-annual
principal installments of $2,000 starting June 20, 1996, subject to certain
adjustments, and are collateralized by the equipment purchased. The
agreement contains certain covenants and restrictions similar to the Company's
Credit Facilities. The Company may prepay any amounts under the agreement
without premium or penalty at any time.
(b)The 1996 Senior Discount Notes:
The Company issued 8 7/8% Senior Discount Notes on January 18, 1996 (the
"1996 Senior Discount Notes") and recorded the net proceeds, exclusive of
transaction costs, of approximately $600,000 as long-term debt. The Company
is accruing to the principal amount of the 1996 Senior Discount Notes of
$924,000 through January 15, 2001. Cash interest will not accrue on the
1996 Senior Discount Notes prior to January 15, 2001, however, the Company
may elect to commence the accrual of cash interest at any time prior to that
date. Commencing July 15, 2001, cash interest will be payable semi-annually.
The 1996 Senior Discount Notes mature on January 15, 2006. On or after
January 15, 2001, the 1996 Senior Discount Notes will be redeemable at the
option of the Company, in whole at any time or in part from time to time, at
the following prices (expressed in percentages of the principal amount
thereof at stated maturity) if redeemed during the twelve months beginning
January 15 of the years indicated below, in each case together with interest
accrued to the redemption date:
Year Percentage
2001.................. 103.32%
2002.................. 102.21%
2003.................. 101.11%
2004 and thereafter... 100.00%
In addition, under certain conditions related to a change in control of the
Company, the Company may be required to repurchase all or any part of the
1996 Senior Discount Notes as stipulated in the note agreement. The 1996
Senior Discount Notes are senior unsecured obligations of the Company, with a
ranking equal to the 1994 Senior Discount Notes, and are subordinated to all
current and future indebtedness of the Company's subsidiaries, including
trade payables. The 1996 Senior Discount Notes contain certain covenants which,
among other things, restrict the ability of the Company to incur debt, create
liens, enter into sale and leaseback transactions, pay dividends, make
certain restricted payments, enter into transactions with affiliates, and
sell assets or merge with or into another company.
<PAGE> 8
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
6. Stock Compensation Programs:
The Company has three stock based compensation programs in effect at June 30,
1996. The programs are described as follows:
(a)Stock Option Plans:
The Company's 1992 and 1993 Stock Plans authorize, among other things, the
grant of options at not less than 100% of the fair market value at the date
of the option grant. The Compensation Committee of the Board of Directors
administers the stock plans. Options vest over a five-year period and are
generally exercisable up to five years after the grant is completely vested.
Options granted under the 1992 and 1993 plans during the first six months of
1996 were not material.
(b)Shareworks:
In 1995 the Company implemented an employee benefit plan which is comprised
of a grant plan and a match plan jointly known as Shareworks. The grant plan
enables the Company to grant shares of the Company's common stock to eligible
employees based upon a percentage of the employee's eligible pay, up to 5%. The
original grant vests after three years with any additional grants vesting
immediately once the initial three year period has been met. On December 29,
1995, the Company granted approximately 128,000 shares of stock under this part
of the plan. The Company has not granted any shares during 1996.
The match plan allows eligible employees to defer between 1% and 10% of eligible
pay to purchase common stock of the Company at the stock price on each pay
period date. The Company matches the shares purchased by the employee on a one-
for-one basis. The stock which is credited to each employee's account to match
the employee's purchase during any calendar quarter, vests three years after the
end of that quarter. The amount deferred by employees for purchases of stock
from January 1, 1996 through June 30, 1996 was $2,193.
(c)Shareworks Plus:
In 1996 the Company implemented a new employee stock compensation program
which grants stock awards with a four-year life and immediate vesting to
certain key executive employees under a program known as Shareworks Plus.
Under this program, the value received by the employee upon exercise of the
award is determined by the rate of increase in the Company's stock price
compared to the rate of increase in the S&P 500 index, measured from the
grant date. If the Company's common stock price performance is at or below the
price performance of the S&P 500 index, or under certain other circumstances
defined in the program, the value to be received by the employee upon
exercise is $0. If the Company's common stock price performance is above the
price performance of the S&P 500 index the value received by the employee
upon exercise, which will normally be paid in common stock of the Company,
increases. The Company granted approximately 923,000 awards under this plan
during the first six months of 1996. Subject to the approval of the
Company's Compensation Committee of the Board of Directors, additional grants
will be made quarterly. Terms of the Shareworks Plus program may be modified
from time to time by the Compensation Committee of the Board of Directors.
<PAGE> 9
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
6. Stock Compensation Programs:(continued)
In the first quarter of 1996, the Company adopted the accounting provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation (SFAS 123). SFAS 123 encourages entities to adopt the fair
value method of accounting for their stock-based compensation plans. Under the
fair value based method, compensation cost for stock-based compensation plans is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which for the Company is the vesting
period. For the Company's Shareworks Plus program, the fair value was
determined using option-pricing models that take into account the stock price at
the grant date, the exercising price, a two year expected life for the award, an
estimated volatility of 30% for the Company's stock price, no expected
dividends, and a risk-free interest rate of 5.27% over the expected life of
the award. For the Company's other stock compensation plan, Shareworks, the
fair value of the match shares was determined by reference to the market value
of the stock that was purchased by the employee and the fair value of the grant
shares was determined by the market value of the stock at the grant date.
The Company recognized compensation expense of $890 related to the Shareworks
plan and $5,995 related to the Shareworks Plus program in the six month period
ended June 30, 1996. The pro forma impact of adopting the fair value method of
accounting in the six month period ended June 30, 1995 was immaterial primarily
because the number of options granted in that period under the 1992 and 1993
Stock Option Plans were not material and the fact that the Shareworks and
Shareworks Plus programs were not yet implemented. During the initial phase-in
period, the effects of applying SFAS 123 for recognizing compensation cost may
not be representative of the effects on reported net loss or income for future
quarters or years because the options in the Stock Option Plans and the match
and grant shares made under the Shareworks program vest over several years and
additional awards will be made in the future.
Under the Company's Shareworks Plus program, the Company granted
approximately 923,000 awards during the first six months of 1996, at initial
exercise prices that range from $26.62 to $31.13. Approximately 216,000
awards were exercised during the six month period ended June 30, 1996. The
fair value of the awards granted was estimated to be $6.50 per award.
7. Commitments and Contingencies:
In 1994, several former stockholders of MFS Telecom, a subsidiary of the
Company, filed a lawsuit against the Company, the Company's former majority
stockholder, Kiewit Diversified Group, Inc. ("KDG"), and the Company's chief
executive officer regarding the sale of their shares of MFS Telecom to the
Company in September 1992. The plaintiffs alleged that certain information
was concealed from them, which caused them to sell their shares at an inadequate
price. KDG agreed to indemnify the Company against any claims asserted by the
former stockholders. During July 1996 this lawsuit was settled with no cost to
the Company.
The Company is also involved in various other claims and regulatory proceedings
incidental to its business. Management believes that any resulting liability
beyond that provided should not materially affect the Company's financial
position, results of operations or cash flows.
<PAGE> 10
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
8. Merger Agreement:
On August 12,1996 the Company issued approximately 58 million shares of common
stock and approximately 6 million options to purchase the Company's common stock
as consideration for UUNET Technologies, Inc. (UUNET) common stock and options
to purchase UUNET common stock, respectively. The aggregate purchase price is
estimated to be approximately $2.1 billion. The Company anticipates that a
substantial portion of the purchase price will be allocated to intangible assets
including goodwill and expects to amortize those intangible assets over periods
of up to five years. The actual allocation of the purchase price and
determination of useful lives will be made after further evaluation.
<PAGE> 11
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was founded in 1987 and commenced operations in 1988. The Company
operates through its subsidiaries in two business segments, telecommunications
services and network systems integration. The telecommunications services
segment is comprised of the MFS Telecom Companies, which provide services to
large customers through MFS Telecom and MFS Datanet, the MFS Intelenet
Companies, which provide services to small and medium sized customers through
MFS Intelenet, MFS International, which provides services to customers
internationally and MFS Global Network Services, which manages the Company's
network platform. The network systems integration segment provides services
primarily through MFS Network Technologies. The Company's growth was funded by
capital contributions from its former majority stockholder, Kiewit Diversified
Group Inc. ("KDG"), until an initial public offering in 1993. Since that public
offering, the Company has funded its growth through a combination of debt and
equity financing including, most recently, a $1.3 billion common stock offering
in July 1996.
Telecommunications Services. The Company's telecommunications services include
integrated local and long-distance services as well as special access, private
line and high speed data communications services, among others. These services
predominately result in monthly recurring revenues. The Company provides these
services in an expanding number of major metropolitan areas. As of July, 1996,
the Company provides services on its networks, or through the resale of
services, or has network operations under development in 52 major metropolitan
areas in the United States and abroad.
The development of the Company's businesses and the installation and expansion
of its networks require significant expenditures, a substantial portion of which
is incurred before the realization of revenues. These expenditures, together
with the associated early operating expenses, result in negative cash flow until
an adequate customer base is established. As this customer base grows,
incremental revenues are added with minimal additional expense, providing
significant contributions to cash flow. The Company also incurs ongoing capital
expenditures with respect to both existing and new networks which are directly
related to the installation of new revenue producing circuits. These costs vary
based on the specific type of circuit installed and the location of the
customer.
The MFS Telecom Companies
- -------------------------
Through MFS Telecom, the Company provides dedicated special access and
private line service to business and government end users. These services
are provided primarily over digital fiber optic telecommunications networks
that the Company has either installed or acquired and subsequently expanded.
The networks also establish a platform that can be used to provide additional
enhanced voice, data and video services to its customers. MFS Telecom also
offers local switched services to its customers in several areas utilizing the
Company's integrated switching platform.
<PAGE> 12
Through MFS Datanet, the Company provides high-speed data communications
services to business and government users over an international ATM network
which the Company believes to be the most advanced in the world. MFS Datanet
uses the Company's networks for customers located in buildings where the
Company already provides special access, private line or switched services,
requiring significantly less capital expenditures because data communications
customers can, to a certain extent, utilize existing fiber optic networks,
electronics and building equipment rooms. The Company will incur additional
capital costs for the installation of new revenue producing circuits. The
level of costs may vary based upon the type of circuit installed and the
location of the customer.
The MFS Intelenet Companies
- ---------------------------
Through MFS Intelenet, the Company provides a single source for integrated
local and long distance telecommunications services and facilities management
to small and medium sized businesses. By utilizing its existing networks and
facilities, the Company minimizes capital expenditures for transmission
facilities. However, significant capital costs have been and will be
incurred for switching equipment, equipment maintained at customer locations
and additional building wiring costs.
MFS International
- -----------------
Through MFS International, the Company provides telecommunication services to
business and government users predominately in several major European
metropolitan areas as well as outbound international service from the United
States and Europe. The Company is offering services over its networks, or
through resale of international telecommunications services in London,
England, Frankfurt, Germany, Paris, France, Stockholm, Sweden, Zurich,
Switzerland and Hong Kong.
MFS Global Network Services
- ---------------------------
Through MFS Global Network Services, the Company manages the operation of its
network and future network development in order to offer the services
described above in a cost effective manner.
The incurrence of significant initial development and roll out expenses in
advance of anticipated future revenues will continue to affect the operating
results of the telecommunications services segment. Anticipated sales growth
in the telecommunication services segment will also continue to drive
increasing deployment of electronic equipment required to initiate customer
service.
Network Systems Integration Services. The Company, primarily through MFS
Network Technologies, designs, engineers, develops and manages the
installation of the Company's new fiber optic networks and network expansions.
In 1991, the Company began to offer network systems integration services to
third parties. These services have been characterized by significant revenues
concentrated in a relatively small number of large projects for third parties.
In 1993, the Company also began to offer services related to Intelligent
Transportation Systems ("ITS"). The Company recognizes revenue based upon the
amount of network systems integration services performed. The amount of the
Company's network systems integration services performed can vary on a quarterly
basis depending upon individual customer contract requirements.
<PAGE> 13
Results of Operations
The following table presents revenue, loss from operations and EBITDA from each
of the Company's reportable business segments for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue:
Telecommunications services... $188,403 $117,079 $353,993 $220,867
Network systems integration... 41,303 22,926 62,029 37,478
------- ------- ------- -------
Total........................ $229,706 $140,005 $416,022 $258,345
======= ======= ======= =======
Loss from operations:
Telecommunications services... $(69,371) $(57,432) $(135,365) $(112,781)
Network systems integration... (675) (1,129) (2,039) (2,336)
------- ------- ------- --------
Total........................ $(70,046) $(58,561) $(137,404) $(115,117)
======= ======= ======= ========
EBITDA:(1)
Telecommunications services... $(18,722) $(26,325) $(37,560) $(53,197)
Network systems integration... 199 (588) (371) (1,199)
------- ------- ------- -------
Total........................ $(18,523) $(26,913) $(37,931) $(54,396)
======= ======= ======= =======
</TABLE>
(1) EBITDA consists of earnings (losses) before interest, income taxes,
depreciation, amortization, non cash stock-based compensation and other non-
operating income or expenses. EBITDA is commonly used in the communications
industry to analyze companies on the basis of operating performance. EBITDA is
not intended to represent cash flow for the periods. See Consolidated
Statements of Cash Flows.
Three Months Ended June 30, 1996 vs. Three Months Ended June 30, 1995
Telecommunications Services
- ---------------------------
Telecommunications services revenue increased to $188.4 million in the
three months ended June 30, 1996 from $117.1 million in the three months ended
June 30, 1995, an increase of $71.3, or 61%. Revenues for each of the key
elements of the telecommunications segment were as follows, in millions:
1996 1995 Increase
---- ---- --------
MFS Telecom Companies $ 68.6 $ 45.5 $ 23.1
MFS Intelenet Companies 84.6 64.6 20.0
MFS International 35.2 7.0 28.2
----- ----- -----
$188.4 $117.1 $ 71.3
----- ----- -----
The increases resulted from increased market penetration of all
telecommunications services of the Company. The especially large increase in
revenues, measured on a percentage basis, from MFS International reflect strong
sales in the United Kingdom and a growing revenue base in continental Europe.
<PAGE> 14
Since the end of 1993 the Company has separately tracked the MFS Telecom
results of operations for the 14 network cities and expansions that were
materially complete at year end 1993 (the "Base Cities Competitive Access
Operations"). These Base Cities Competitive Access Operations produced revenue
of $42.1 million in the three months ended June 30, 1996 and $30.9 million in
the three months ended June 30, 1995, an increase of $11.2 million, or 36%. The
increase in revenue from these operations resulted primarily from increased
market penetration in these cities. Due to a modification of the Company's
internal organization within the telecommunications services segment it will
become increasingly less meaningful to separate the Base Cities Competitive
Access Operations from other operations because of the increasingly commonality
of revenues and costs within Base Cities Competitive Access Operations,
expansions and types of services. For this reason, the Company may discontinue
separate disclosure for these Base Cities Competitive Access Operations in the
future. The Company continues to review other modifications to its financial
disclosures which the Company believes will provide more meaningful information
about its activities
Annualized monthly recurring revenue increased to approximately $795
million at June 30, 1996 from approximately $505 million at June 30, 1995, an
increase of 57%. The increase reflects the sales of additional services to
current and new customers in existing and new markets. Monthly recurring
revenue represents monthly service charges billable to telecommunications
services customers as of the last day of the period indicated, but excludes
non-recurring revenues for certain one-time services, such as installation fees
or equipment charges.
Telecommunications services operating expenses increased to $180.6 million
or 96% of segment revenue in the three months ended June 30, 1996 from $118.6
million or 101% of segment revenue in the three months ended June 30, 1995, an
increase of $62.0 million. The change includes an increase of $45.3 million
in circuit charges, including local and long distance service costs, and
personnel costs necessary to support the Company's growth. The remaining
increase of $16.7 million relates to increased rent, utilities and other costs
incurred to support the increased revenue base. Telecommunications services
operating expenses consist of costs associated directly with network operations,
including salaries, sales commissions and related employee benefits, rent
expense, right-of-way fees, other network costs and local and long distance
service costs.
Telecommunications services depreciation and amortization expense increased
to $47.4 million in the three months ended June 30, 1996 from $31.1 million in
the three months ended June 30, 1995, an increase of $16.3 million or 52%.
The increase is primarily related to the expanded fixed asset base of the
Company's networks which includes increasing amounts of electronic equipment
with depreciable lives that are shorter than the Company's other major fixed
asset categories.
Telecommunications services general and administrative expenses increased
to $29.8 million in the three months ended June 30, 1996 from $24.8 million in
the three months ended June 30, 1995, an increase of $5.0 million or 20%. The
change is primarily due to an increase of $4.5 million in personnel costs.
Management of the Company expects general and administrative services to
continue to increase during 1996 as the Company expands its services.
<PAGE> 15
Telecommunications EBITDA loss decreased to $(18.7) million in the three
months ended June 30, 1996 from $(26.3) million in the three months ended June
30, 1995. EBITDA in 1996 and 1995 for each of the key elements of the
telecommunications segment were as follows, in millions:
1996 1995 Change
---- ---- ------
MFS Telecom Companies $ 11.4 $ 5.1 $ 6.3
MFS Intelenet Companies (22.3) (21.1) (1.2)
MFS International (7.8) (10.3) 2.5
------ ------ -----
$(18.7) $(26.3) $ 7.6
------ ------ -----
The increase at the MFS Telecom Companies reflects the high incremental margins
inherent in the dedicated special access and private line services primarily
provided over the Company's own facilities. The small increase in EBITDA loss
at MFS Intelenet reflects the additional costs incurred to expand the integrated
local and long distance telecommunications service markets including normal
increases in operating expenses offset by the additional EBITDA margins provided
by increased revenues resulting from a sales strategy that emphasized the
provision of local switch services in advance of the implementation of the
Telecommunications Act of 1996. The decrease in EBITDA loss at MFS
International reflects the additional EBITDA margins provided by increased
revenues partially offset by the additional costs incurred to expand the
Company's international service, particularly in new markets.
The Base Cities Competitive Access Operations produced EBITDA of $22.3
million before parent company allocations in the three months ended June 30,
1996 and $14.4 million in the three months ended June 30, 1995, an increase of
$7.9 million, or 55%. For reasons noted earlier, the Company may discontinue
separate disclosure for these Base Cities Competitive Access Operations in the
future. The Company continues to review other modifications to its financial
disclosures which the Company believes will provide more meaningful information
about its activities.
Network Systems Integration
- ---------------------------
Third party revenue from services offered by the Company's network systems
integration segment increased to $41.3 million in the three months ended June
30, 1996 from $22.9 million in the three months ended June 30, 1995, an increase
of $18.4 million or 80%. The increase is due to an increase in the number of
new projects, including a contract to provide design and construction services
for a wireless personal communications system.
Network systems integration operating expenses increased to $37.3 million
in the three months ended June 30, 1996 from $20.5 million in the three months
ended June 30, 1995, an increase of $16.8 million or 82%. The increase is
primarily due to the increased level of operating expenses related to the
projects noted above, including the continuing development and investment in
Intelligent Transportation Systems ("ITS") service projects. Network systems
integration operating expenses consist of direct costs associated with the
network systems integration projects.
Network systems integration general and administrative expenses increased
to $4.1 million in the three months ended June 30, 1996 from $3.0 million in
the three months ended June 30, 1995, an increase of $1.1 million or 37%. The
increase reflects the increased third party work noted above.
Network systems integration EBITDA increased to $.2 million in the three
months ended June 30, 1996 from $(.6) million in the three months ended June 30,
1995. This resulted from the increased margins realized from the increase in
third party work noted above.
<PAGE> 16
Other Income (Expense)
- ----------------------
Other income (expense) increased to $(22.6) million of other expense in the
three months ended June 30, 1996 from $(6.2) million of other expense in the
three months ended June 30, 1995. The increase in other expense resulted
primarily from additions to interest expense incurred in connection with the
issuance of the 1996 Senior Discount Notes. This increase was partially offset
by increased interest income from the investment of the proceeds of the 1996
Senior Discount Notes.
Income Taxes
- ------------
The income tax expense of $.1 million for the three months ended June 30,
1996 and 1995, resulted from estimated state and foreign tax liabilities.
Net Loss
- --------
Net loss increased to $92.7 million in the three months ended June 30, 1996
from $64.8 million in the three months ended June 30, 1995, an increase of $27.9
million. The increase resulted primarily from increased depreciation,
amortization and interest expense.
Backlog. The network systems integration and facilities management services
segment had third party backlog of approximately $202 million at June 30, 1996.
Backlog consists of firm contracts less revenue recognized to date by the
Company.
Six Months Ended June 30, 1996 vs. Six Months Ended June 30, 1995
Telecommunications Services
- ---------------------------
Telecommunications services revenue increased to $354.0 million in the six
months ended June 30, 1996 from $220.9 million in the six months ended June 30,
1995, an increase of $133.1, or 60%. Revenues for each of the key elements of
the telecommunications segment were as follows, in millions:
1996 1995 Increase
---- ---- --------
MFS Telecom Companies $131.5 $ 85.5 $ 46.0
MFS Intelenet Companies 164.1 123.5 40.6
MFS International 58.4 11.9 46.5
----- ----- -----
$354.0 $220.9 $133.1
----- ----- -----
The increases resulted from increased market penetration of all
telecommunications services of the Company. The especially large increase in
revenues, measured on a percentage basis, from MFS International reflect strong
sales in the United Kingdom and a growing revenue base in continental Europe.
The Base Cities Competitive Access Operations produced revenue of $81.7
million in the six months ended June 30, 1996 and $59.8 million in the six
months ended June 30, 1995, an increase of $21.9 million, or 37%. The increase
in revenue from these operations resulted primarily from increased market
penetration in these cities. For reasons noted earlier, the Company may
discontinue separate disclosure for these Base Cities Competitive Access
Operations in the future. The Company continues to review other modifications
to its financial disclosures which the Company believes will provide more
meaningful information about its activities.
<PAGE> 17
Telecommunications services operating expenses increased to $337.0 million
or 95% of segment revenue in the six months ended June 30, 1996 from $226.1
million or 102% of segment revenue in the six months ended June 30, 1995, an
increase of $110.9 million. The change includes an increase of $87.8 million in
circuit charges, including local and long distance service costs, and personnel
costs necessary to support the Company's growth. The remaining increase of
$23.1 million relates to increased rent, utilities and other costs incurred to
support the increased revenue base.
Telecommunications services depreciation and amortization expense increased
to $91.4 million in the six months ended June 30, 1996 from $59.6 million in the
six months ended June 30, 1995, an increase of $31.8 million or 53%. The
increase is primarily related to the expanded fixed asset base of the Company's
networks which includes increasing amounts of electronic equipment with
depreciable lives that are shorter than the Company's other major fixed asset
categories.
Telecommunications services general and administrative expenses increased
to $60.9 million in the six months ended June 30, 1996 from $48.0 million in the
six months ended June 30, 1995, an increase of $12.9 million or 27%. The
change is primarily due to an increase of $10.8 million in personnel costs.
Management of the Company expects general and administrative services to
continue to increase during 1996 as the Company expands its services.
Telecommunications EBITDA loss decreased to $(37.6) million in the six
months ended June 30, 1996 from $(53.2) million in the six months ended June 30,
1995. EBITDA in 1996 and 1995 for each of the key elements of the
telecommunications segment were as follows, in millions:
1996 1995 Change
---- ---- ------
MFS Telecom Companies $ 23.3 $ 8.6 $ 14.7
MFS Intelenet Companies (43.1) (42.1) (1.0)
MFS International (17.8) (19.7) 1.9
------ ------ ------
$(37.6) $(53.2) $ 15.6
------ ------ ------
The increase at the MFS Telecom Companies reflects the high incremental margins
inherent in the dedicated special access and private line services primarily
provided over the Company's own facilities. The small increase in EBITDA loss
at MFS Intelenet reflects the additional costs incurred to expand the integrated
local and long distance telecommunications service markets including normal
increases in operating expenses offset by the additional EBITDA margins provided
by increased revenues resulting from a sales strategy that emphasized the
provision of local switch services in advance of the implementation of the
Telecommunications Act of 1996. The decrease in EBITDA loss at MFS
International reflects the additional EBITDA margins provided by increased
revenues partially offset by the additional costs incurred to expand the
Company's international service, particularly in new markets.
The Base Cities Competitive Access Operations produced EBITDA of $42.9
million before parent company allocations in the six months ended June 30, 1996
and $27.2 million in the six months ended June 30, 1995, an increase of $15.7
million, or 58%. For reasons noted earlier, the Company may discontinue
separate disclosure for these Base Cities Competitive Access Operations in the
future. The Company continues to review other modifications to its financial
disclosures which the Company believes will provide more meaningful information
about its activities.
<PAGE> 18
Network Systems Integration
- ---------------------------
Third party revenue from services offered by the Company's network systems
integration segment increased to $62.0 million in the six months ended June 30,
1996 from $37.5 million in the six months ended June 30, 1995, an increase of
$24.5 million or 65%. The increase is due to an increase in the number of new
projects, including a contract to provide design and construction services for a
wireless personal communications system.
Network systems integration operating expenses increased to $55.0 million
in the six months ended June 30, 1996 from $32.9 million in the six months ended
June 30, 1995, an increase of $22.1 million or 67%. The increase is primarily
due to the increased level of operating expenses related to the projects noted
above, including the continuing development and investment in ITS service
projects.
Network systems integration general and administrative expenses increased
to $7.8 million in the six months ended June 30, 1996 from $5.8 million in the
six months ended June 30, 1995, an increase of $2.0 million or 34%. The
increase reflects the increased third party work noted above.
Network systems integration EBITDA loss decreased to $(0.4) million in the
six months ended June 30, 1996 from $(1.2) million in the six months ended June
30, 1995. This resulted from the increased margins realized from the increase
in third party work noted above.
Other Income (Expense)
- ----------------------
Other income (expense) increased to $(41.3) million of other expense in the
six months ended June 30, 1996 from $(13.4) million of other expense in the six
months ended June 30, 1995. The increase in other expense resulted primarily
from additions to interest expense incurred in connection with the issuance of
the 1996 Senior Discount Notes. This increase was partially offset by increased
interest income from the investment of the proceeds of the 1996 Senior Discount
Notes.
Income Taxes
- ------------
The income tax expense of $.2 million for the six months ended June 30,
1996 and 1995, resulted from estimated state and foreign tax liabilities.
Net Loss
- --------
Net loss increased to $178.9 million in the six months ended June 30, 1996
from $128.7 million in the six months ended June 30, 1995, an increase of $50.2
million. The increase resulted primarily from increased depreciation,
amortization and interest expense.
Liquidity and Capital Resources
The Company's total assets have increased to $2.4 billion at June 30, 1996.
The Company's growth was funded by capital contributions from its former
majority stockholder, KDG, until an initial public offering in 1993. Since that
public offering, the Company has funded its growth through a combination of debt
and equity financing including, most recently, a $1.3 billion common stock
offering in July 1996. The Company's current assets at June 30, 1996 (prior to
the July common stock offering) of $595.5 million, including cash and marketable
securities aggregating $287.1 million, exceeded current liabilities of $311.3
million, providing working capital of $284.2 million. Network and equipment,
net of depreciation, comprise $1.4 billion of total assets.
<PAGE> 19
The Company's operating activities used net cash of $78.4 million in the
six months ended June 30, 1996 and $66.8 million in the six months ended June
30, 1995. The increase in cash used by operating activities was primarily due
to the increased loss from operations incurred expanding the Companies services
and an increase in cash used supporting increased levels of accounts receivable
and other assets which is partially offset by increased depreciation,
amortization and non cash interest expense.
In order to finance the Company's operations and network development, the
Company has utilized a variety of financing vehicles including:
- -capital contributions from its former majority shareholder,
- -proceeds from its initial public offering and a follow-on public offering in
1993,
- -proceeds from 9 3/8% Senior Discount Notes in 1994,
- -availability of proceeds from various revolving credit facilities arranged
in 1994 and 1995,
- -proceeds from a public offering of Depositary Shares which represent an
interest in preferred stock of the Company, in 1995,
- -sale-leaseback transactions in 1995 and,
- -proceeds from 8 7/8% Senior Discount Notes in the first quarter of 1996.
Proceeds from these financing transactions that occurred in the six month
periods ended June 30, 1996 and 1995 resulted in net cash provided by financing
activities of $549.5 million and $312.0 million, respectively.
Including the proceeds of the July common stock offering on a pro forma
basis, at June 30, 1996, the Company had approximately $1.9 billion of available
liquidity, including cash, marketable securities and unused lines of credit.
During the first six months of 1996, the Company's capital expenditures,
including the acquisitions of businesses, were $311.9 million compared to
$265.8 million in the first six months of 1995. The capital expenditures are
primarily for the construction or expansion of networks and the purchase of
related equipment. Net cash used in all investing activities was $447.6 million
in the first six months of 1996 and $235.1 million in the first six months of
1995.
On May 7, 1996 the Company announced that it intends to undertake certain
initiatives designed to take advantage of opportunities created by changes in
telecommunications laws and the rapid development of Internet-based
communications networks. These initiatives involve increasing the number of
cities served, expanding its networks in existing cities, constructing or
acquiring its own intercity high capacity network, accelerating central office
interconnection, deployment of additional switches, and providing high-speed
local Internet access.
Expenditures for the initiatives are subject to the Company's review of a
number of factors including the cost of any additional capital required,
technological developments and market conditions. In addition, each initiative
may be implemented in whole or in part, and independently of any other
initiative, ensuring that the Company retains maximum financial and operating
flexibility. The Company anticipates that implementation of these initiatives
including certain of the Internet-related initiatives, will, together with
currently anticipated expenditures, result in total anverage annual capital
expenditures of approximately $1.0 billion to $1.3 billion over the period of
implementation, which the Company expects to be up to four years. Since a
significant portion of the Company's capital expenditures are success-based
(that is, related directly to revenue growth), actual capital expenditures may
vary significantly from the above range depending on the level of incremental
sales. This range is also subject to a number of factors, including the pace
and extent of network development, levels of incremental sales, as well as
regulatory actions by state, federal and international authorities, which,
individually or in the aggregate, could cause material changes in capital
<PAGE> 20
expenditure requirements. The available liquidity at June 30, 1996 and the
proceeds from the common stock offering completed in July will be used to fund
the initial capital expenditures of these initiatives. The Company expects to
fund the balance of its capital requirements through existing resources,
internally generated funds and additional debt or equity financing as
appropriate.
Merger Agreement
On August 12, 1996 the Company issued approximately 58 million shares
of common stock and approximately 6 million options to purchase the Company's
common stock as consideration for UUNET Technologies, Inc. (UUNET) common stock
and options to purchase UUNET common stock, respectively. The aggregate
purchase price is estimated to be approximately $2.1 billion. The Company
anticipates that a substantial portion of the purchase price will be allocated
to intangible assets including goodwill and expects to amortize those intangible
assets over periods of up to five years. The actual allocation of the purchase
price and determination of useful lives will be made after further evaluation.
Other Matters
As evidenced by the merger agreement noted above the Company from time to
time evaluates acquisitions in pursuit of its business strategy, either as an
alternative to constructing networks, adding customers, or to the introduction
of services that compliment existing and/or planned services. Such acquisitions
may be significant in size and could use a substantial portion of the Company's
available cash.
From time to time, the Company has had discussions with other communications
entities concerning the establishment of possible strategic relationships,
including transactions involving substantial acquisitions, combinations and
equity investments in the Company or one of its subsidiaries. In addition,
certain acquisitions may provide the Company with the opportunity to acquire
an established customer base. The Company intends to consider appropriate
opportunities to establish strategic relationships.
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation. SFAS 123 encourages entities to adopt a fair value
based method of accounting for employee stock compensation plans, however it
also allows an entity to continue to measure compensation cost for those plans
using the intrinsic value based method of accounting. Under the intrinsic value
based method, many companies, including MFS, had not previously recognized
compensation costs for many of their stock compensation plans.
The Company adopted the fair value based method of SFAS 123 in the first
quarter of 1996. The Company believes that the fair value method of accounting
more appropriately reflects the substance of the transaction between an entity
that issues stock options, or other stock-based instruments, and its employees;
that is, an entity has granted something of value to an employee (the stock
option or other instrument) generally in return for their continued employment
and services. The Company believes that the value of the insturment granted
to employees should be recognized in financial statements because nonrecognition
implies that either the instruments have no value or that they are free to
employees, neither of which is an accurate reflection of the substance of the
transaction. Although the recognition of the value of the instruments results
in compensation expense in an entity's financial statements, the expense differs
from other common forms of compensation expenses in that these charges typically
will not be settled in cash, but rather through issuance of common stock.
<PAGE> 21
The Company has introduced certain changes to its stock-based compensation
plans, including a new award plan for key executive employees which ultimately
have value to the employee only if the Company's stock price outperforms the
S&P 500. The Company has granted approximately 923,000 awards under the new
plan in the first six months of 1996, and anticipates that additional grants
will be made on a quarterly basis. The amount of non cash stock-based
compensation expense recorded in the six month period ended June 30, 1996, as
measured under SFAS 123, was $6,885. The Company believes that these charges
will continue in 1996 and thereafter. The amount of the non-cash charge will be
dependent upon a number of factors, including the number of options and awards
granted and the fair value estimated at the time of grant.
Effects of Inflation
Inflation has not had a significant effect on Company operations. However,
there can be no assurance that inflation will not have a material effect on
the Company's operations in the future.
Forward-looking Statements
The matters discussed in this Form 10Q contain forward-looking statements
that involve risks and uncertainties including risk of changing market
conditions, competitive and regulatory risk associated with the
telecommunications and Internet industries, the impact of competitive services
and pricing, the impact of the Telecommunications Act of 1996, the successful
and timely completion of the UUNET Technologies, Inc. merger, and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission.
<PAGE> 22
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
--------------------------------
Item 1. Legal Proceedings
On March 4, 1994, several of the former minority stockholders of MFS
Telecom, Inc., a subsidiary of the Company, filed a lawsuit against Kiewit
Diversified Group Inc.("KDG"), the Company and its chief executive officer in
the United States District Court for the Northern District of Illinois, Case
No. 94C-1381, captioned Arthur Brantman et al. v. MFS Communications Company,
Inc. et al. Plaintiffs alleged that MFS fraudulently concealed material
information about its plans from them, causing them to sell their shares at an
inadequate price and further alleged damages of at least $100 million. KDG
agreed to indemnify the Company against any claims asserted by the former
stockholders. On July 9, 1996 this lawsuit was settled with no cost to the
Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Schedule computing consolidated net loss per share applicable to
common stockholders.
(b) A report on Form 8-K, dated April 30, 1996, was filed reporting under
Item 5 that the Company and UUNET Technologies, Inc. executed an agreement and
plan of merger.
A report on Form 8-K, dated May 10, 1996, was filed reporting under
Item 5 that the Company plans to undertake a series of initiatives
designed to position it to take advantage of opportunities created by changes
in telecommunications laws and the rapid development of Internet-based
communications networks.
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MFS COMMUNICATIONS COMPANY, INC.
/s/ R. Douglas Bradbury
--------------------------------
Dated: August 14, 1996 R. Douglas Bradbury
Chief Financial Officer
MFS COMMUNICATIONS COMPANY, INC.AND SUBSIDIARIES
SCHEDULE COMPUTING CONSOLIDATED NET LOSS PER SHARE
APPLICABLE TO COMMON STOCKHOLDERS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Common shares outstanding
- -------------------------
Three months ended June 30, Six months ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common shares outstanding at
beginning of period(1) 125,619,662 128,852,624 130,260,228 128,306,436
Add issuances 1,204,927 176,900 2,364,361 723,088
Less retirement of treasury stock - - (5,800,000) -
----------- ----------- ------------ -----------
Common shares outstanding at
end of period 126,824,589 129,029,524 126,824,589 129,029,524
=========== =========== ============ ============
Net loss per share applicable to common
- ---------------------------------------
stockholders
- ------------
Three months ended June 30, Six months ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
Weighted average number of common
shares outstanding 126,176,000 128,960,000 125,596,000 128,845,000
=========== =========== =========== ===========
Net loss $ (92,696) $ (64,828) $ (178,920) $ (128,736)
Dividends on preferred stock (7,460) - (14,532) -
--------- --------- ---------- ----------
Net loss applicable to common
stockholders $(100,156) $ (64,828) $ (193,452) $ (128,736)
========== ========== =========== ===========
Net loss per share applicable to
common stockholders $ (0.79) $ (0.50) $ (1.54) $ (1.00)
========== ========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(1) All share data has been stated reflecting the common stock split in 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10Q
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 74680
<SECURITIES> 212448
<RECEIVABLES> 198722
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 595525
<PP&E> 1634310
<DEPRECIATION> 282918
<TOTAL-ASSETS> 2353040
<CURRENT-LIABILITIES> 311287
<BONDS> 1299210
0
151
<COMMON> 1268
<OTHER-SE> 672373
<TOTAL-LIABILITY-AND-EQUITY> 2353040
<SALES> 0
<TOTAL-REVENUES> 416022
<CGS> 0
<TOTAL-COSTS> 392084
<OTHER-EXPENSES> 92588
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50480
<INCOME-PRETAX> (178720)
<INCOME-TAX> 200
<INCOME-CONTINUING> (178920)
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